Amazon, Berkshire Hathaway, and JP Morgan Chase (ABHJP) announced this week in a cryptic one page brief that they intended on forming a new health care company. The announcement was obviously pre-preemptive, which suggests the three titans are already in the process of assembling a management team to make this possibility a reality. The question is–why? The three companies already self insure their employees’ medical expenses, theoretically paying the health care conglomerates only an administrative fee to maintain their cafeteria plans. The answer is likely transparency–while ABHJP do pay their own costs, those costs are really a reimbursement of bills produced from the opaque box that make up the oligopolistic private health care system instead of the “premiums” paid by smaller firms. The difference between self-insurance and premium plans is cosmetic–premiums are determined by conglomerate actuaries, and companies whose costs exceed their premiums have their premiums upwardly adjusted the following plan year.
So how does one penetrate the world of the health care conglomerates in an attempt to control not just administrative fees, but the costs of health care? Well, you don’t. That’s why it is an oligopoly. Even the federal government, through Medicare, has a very limited influence on the oligopoly. After all, the conglomerates can always choose not to cover Medicare patients for any medical procedures for which they don’t get their prices.
Perhaps the most frustrating aspect of medical costs offered by the conglomerates is the inflation. Health care costs have grown at a 6.5%-11.7% rate per year since the Financial Crisis of 2007-2008, a period where inflation was either zero or just slightly above it. The Federal Reserve estimates that medical costs of consumers has grown 70% faster than inflation, a mind boggling figure that still substantially understates true cost inflation as much of the consumer’s medical costs have been borne by employers.
Why the ridiculous inflation in medical care? Because there is no incentive to control costs. There is no competition among health care providers at any level and pricing is obscured until after procedures are performed. Consumers only make choices as to how much their co-insurance is–their out of pocket percentage relative to their share of premiums paid to their employers–rather than the cost of the care itself. Thus the conglomerates are bloated with executives making enormous salaries and bonuses, expensive office building rents, labyrinthine arcane cost structures maintained for the purpose of cost obscurity and complexity, and huge numbers of clerical and phone center staff to produce and collect bills. These costs structures are layered over a massive network of physicians, surgery centers, and hospitals that have their own similar costs structures.
So the only way to bypass this system is to start a new health care company that has control over these costs. That uses information technology to examine the underlying reasons behind high costs and to architect around them. ABHJP companies employ a million people between them–more than enough to get their way. Sure, there will be regulatory and political hurdles–the conglomerates will see a real danger to their business model and will fight to preserve it. This is really why Obamacare never had a realistic chance of succeeding. But unlike the fractured and powerless constituencies that supported Obamacare, ABHJP has real economic and political clout. I’m betting that, barring any disruptive business reason, they are going to pull it off where the government could not.